5 Things You Didn’t Know About Bankruptcy
Spiraling toward bankruptcy seems like the end of your financial future. In one sense, you are in a tough spot. On the other hand, bankruptcy was designed to help people start over, not beat them down. The process looks scary and complicated because, well, it is. But it can also be a light at the end of the debt tunnel. Here are five things that may surprise you and possibly lift your spirits about bankruptcy.
More Than One Type of Bankruptcy
The law can mystify people who have little contact with it. You hear about how one outrageous thing may be legal but another person gets sued for not clearing a sidewalk before 7am. Bankruptcy isn’t simple either. Most people think it’s a one-law-fits-all process. But, there are four types of bankruptcy.
- Chapter 7: The most common form used for discharging unsecured debt. It generally takes 3-4 months and filers have a good chance of retaining property.
- Chapter 13: This process involves creating a repayment plan for creditors over 3-5 years. Filers keep their property and assets as long as they honor the deal. It allows you to stop foreclosures but requires a steady source of income. Secured debt cannot exceed $1,184,200 and unsecured debt must be under $394,725 to qualify.
- Chapter 11: This type of bankruptcy aims at the reorganization of large business debt and repayment.
- Chapter 12: Similar to Chapter 11, this type is limited to farmers and fishermen and tends to be more flexible about debt and repayment options.
You May Keep Your House
Bankruptcy proceedings are designed to give people a fresh start, not drive them into homelessness. A trustee will evaluate the amount of equity that you have in the house. That number involves subtracting the mortgage and home loan balances from the market value. Considering the housing crisis the country continues to recover from, you may get in under the exemption amount. If you have significant equity into the property, the trustee could force a sale or allow you buy back the debt and keep the home.
Florida also has a homestead exemption that heavily favors homeowners. Florida allows for a high level of property value to be exempted. You must be a Florida resident for two years before filing, owned the property for 1,215 days and some land restrictions may apply.
The Public and Messy Moment
If you are uncomfortable sharing financial information with friends and family, bankruptcy could present at least one agonizing experience. Although your situation probably won’t appear in a newspaper, regulations require that all of your creditors are notified by mail about the proceeding. You will need to attend a creditors meeting to review debts, assets and income. The bankruptcy trustee is tasked with asking you pointed and probing questions in a public forum. People that you owe money to can ask direct questions. It’s not uncommon for these to be embarrassing and expose aspects of your financial life you’d prefer to keep confidential. It can take thick skin to weather this brief, but intense airing of dirty laundry.
You Can Still Get a Mortgage
Many people find it downright baffling that you can get a mortgage after receiving a bankruptcy discharge. The standard wait time for acquiring a home loan runs about 2-4 years. There may be a one-year option in some cases.
If you were forced into bankruptcy due to circumstances beyond your control, lenders may make an exception to the longer waiting period. Sometimes people are victims of circumstance rather than over-spending. Lenders can consider such mitigating factors and reduce the time limit to 12 months.
With a new and good credit history established, the FHA or VA may float you loan with a credit score of 640. A score of 580 may be possible with a higher interest rate.
Conventional, non-government insured loans can be obtained by taking out a mortgage insurance policy. The coverage pays the lender in the event you default and the law allows you to discontinue the insurance once you acquire 20 percent equity in the property. Conventional lenders generally look for 2-4 years to pass after a bankruptcy discharge. Remember that the clock starts ticking once debt is discharged, not when you first filed.
You Can Get a Credit Card
It seems counterintuitive that a lending institution would give you a shiny new card after defaulting on debts. After all, credit card debt stands as one of the major contributors to financial mismanagement. But credit card companies have varying policies about eligibility. Your recent bankruptcy may be looked on favorably in one respect. You just discharged debt and cannot do it again for seven years. That provides some security to the company.
Secured cards are generally easy to acquire. Make a $500 deposit and get an equal credit card limit. If you miss a payment, the money in the bank backs it up. Credit unions are generally good sources of secured credit and tend to be less stringent because they are non-profits. You may find that higher interest rate cards are easiest to obtain. If you always pay off the monthly balance, your score should start to climb. Once you hit 650, shop for lower rate cards.
If your financial portfolio is spiraling down, bankruptcy may help you regain your financial footing. Make sure you are properly represented by contacting the professionals at Yardley Law.